The fallout from the collapse of the Icelandic banks continues. The government is sending an emergency task force of accountants (the mind boggles) to help local authorities that are in dire straits. What these financial wizards will do is not clear. Surely the time to consult experts would have been before investing in the Icelandic banks, rather than after losing large sums of money due to their collapse.
Meanwhile, council leaders are demanding an inquiry into the credit rating agencies that gave Icelandic banks a clean bill of health and have met with the Icelandic ambassador to demand compensation from his government for their financial losses. The government, too, is threatening legal action against Iceland unless all the UK depositors are reimbursed.
This is all getting rather silly.
The warnings about Icelandic banks began to sound at least six months ago. While you can forgive individual savers for not keeping their eyes on the financial press, local authorities have finance managers who are supposed to do just that. Councils seem to be frantically looking around for someone else to blame when most of the people who should have prevented this are within their own town halls. Mind you, when the local authority auditor itself ends up losing £10 million, it makes the councils’ finance managers look slightly less stupid.
Many people are getting very xenophobic about how the Icelanders stole our money and saying that the Icelandic government should be forced to give it back.
But there is a question here that, so far, I haven’t heard anyone ask.
The Icelandic banks are, or were, private companies. Each investor, whether an individual, local council or university, had a contract with that private company which it can’t now meet. Is that contract now the responsibility of the government of the country where the bank is based?
Do we really want to establish the principle that the host country of a bank’s head office is responsible for all its liabilities? British banks have subsidiaries all over the world. Take the stricken RBS, for example. It owns Citizens Financial Group, the USA’s eighth largest bank. According to its last annual report, on 31 December 2007 it had $102.2 billion in deposits. If either Citizens Financial Group or RBS itself went bust, which could still happen despite the government’s bail-out, would the British taxpayer have to stump up that $102.2 billion to US savers?
Barclays, Lloyds, HBoS and HSBC all have substantial overseas operations. If any of these banks were to fail, would the British government have to pay off the foreign deposit holders?
That is the implication of making the Icelandic government cover British losses in Icelandic banks.
It is unfortunate that so many people and organisations in the UK have lost money in Icelandic banks. The small savers will get some compensation but the larger ones may have to take their losses on the chin.
Trying to force Iceland to pay up will get us nowhere could set a precedent that we might one day regret.